Despite the $17 billion automotive bailout announced by President Bush, car lots across America will likely continue with their anemic business as unusual.
The announcement may help ease the minds of buyers, giving them more confidence that General Motors and Chrysler won’t seek bankruptcy protection for now.
But the carmakers aren’t completely out of the woods just yet. Sales across the entire industry are down, and the Detroit 3 are still struggling with labor and benefit costs that may spell continued long-term trouble if they can’t gain enough concessions from their unions and bond holders.
The administration’s aid package was crafted by the White House as part of the $700 billion bailout package already approved to rescue the financial industry after Congress balked at passing a separate auto bailout bill earlier this month.
Initially, General Motors will get $9.4 billion in loans in the next two months, while Chrysler will receive $4 billion. The loans are contingent on a raft of concessions required of bond holders, workers and others. As is, Ford is not part of the bailout plan.
The remainder of the bailout would become available after the automakers file a restructuring plan with the government early next year, and the money will come from the second tranche of the financial industry’s aid package.
The administration stepped in on the automakers’ bailout after Senate Republicans rejected a similar plan.
The feeling among many conservative lawmakers was that the failed auto legislation didn’t accomplish enough to ensure the long-term viability of the industry or extract enough concessions from stakeholders, says John Wolkonowicz, senior automotive analyst North America for IHS Global Insight in Lexington, Mass.
“They felt it didn’t give enough clout to negotiate with bond holders or unions,” Wolkonowicz says.
But industry watchers say the auto bailout is not likely to prompt a horde of buyers to beat a path to new car lots.
That’s because, bailout or no bailout, a slumping national economy has people feeling like they are in no position to buy a new car at the same time that a shattered consumer-credit structure is making it difficult for people who want to buy, to actually close the deal.
Meantime, dealerships across the nation are desperate to stimulate sales at nearly any cost. From buy-one, get-one free sales to huge rebates to drastically slashed prices, dealers are trying every trick they know to drive up traffic.
But, as bad as the auto market is today, it would have been worse if even one Detroit automaker had sought bankruptcy protection, says Dana Johnson, chief economist for Dallas-based bank Comerica Inc.
Industry observers agree that allowing any major U.S. carmaker to enter bankruptcy could have spelled disaster for the entire automotive industry, and not just for the one or two companies forced to restructure.
“Bankruptcy is not a good option for anyone,” says Phil Reed, senior consumer advice editor for the online automotive resource Edmunds.com. “It works for many businesses — airlines and the Tribune Co., for example. But if you pick up a newspaper, that isn’t a long-term relationship.”
He said newspaper subscribers don’t have to worry about multiyear vehicle warrantees or the availability of spare parts years later.
Forcing bankruptcy on the automakers would have had far longer and wider-reaching consequences.
Wolkonowicz says two catastrophic reactions would have occurred had one of the carmakers been forced into bankruptcy. It would have created an unstoppable ripple effect, and it would have destroyed any remaining consumer confidence in that company.
For its part, the financial ripple effect would rumble through the entire network of businesses that rely on that carmaker, forcing each company onto the financial rocks along with it. The businesses that support the industry include parts makers, distributors, suppliers and a whole slew of other companies that serve most of the carmakers — foreign and domestic — operating in the United States.
That interconnection means that if Chrysler went under and was no longer able to pay those suppliers, they too would have gone out of business. Without viable suppliers, General Motors, Ford and even the North American operations of Toyota and Honda would no longer fulfill orders at their factories.
The auto industry across the entire continent could grind to a stop, Wolkonowicz says.
“If that were to happen, the consumer would have less choice in vehicles. The companies that supply half of the vehicle options would be gone, and we would pay more for vehicles,” Wolkonowicz says.
The second repercussion, the destruction of consumer confidence, would be equally damaging. Because of the long-term nature of owning a vehicle, very few people would be willing to buy from a bankrupt maker, regardless of how the vehicles were priced.
“The main danger here is resale value,” Wolkonowicz says. “The consumers would just walk away and buy from one of the carmakers that managed to stay standing.”
You only need look as far as the failed Korean carmaker, Daewoo, for an idea of what might happen if one of the Detroit automakers was to seek bankruptcy protection, Wolkonowicz says.
In 2002, Daewoo entered into bankruptcy, and buyers fled to the hills. Within days of the announcement, the remaining inventory was selling at fractions of their sticker price, Wolkonowicz says.
“The demand for Daewoo products just evaporated,” he says. “You could buy a new Daewoo with a sticker price of $14,000 for just $3,000.”
The catastrophic collapse in sales meant Daewoo folded before it ever had a fighting chance to emerge from bankruptcy.
Because they now do not need to declare bankruptcy, the automakers may begin selling cars again.
“To me, the thing that could make an impact on the consumer level would be confidence that the company will avoid bankruptcy,” Comerica’s Johnson says. Getting the influx of cash repairs some of those concerns about the companies’ viability, he says.
If buyers have the money, now may be one of the best times to buy a new car. “There probably hasn’t been as good a time to buy a car in recent history,” Wolkonowicz says.
Reed said the incentives being offered now are unparalleled.
“These are wild incentives, never before seen; things like buy-one, get-one-free (offers),” he says. “You think, ‘wow, that sounds good.’ But then you think, ‘how practical is that for most people?’
“If you need two cars, then that’s great. But if it is just being thrown in to sweeten the deal, then the cost of insuring and maintaining two cars might start to get a bit overwhelming,” Reed says.
These deals are likely to continue until cars start rolling off the lots. And it might take more time, and more than just a single bailout bill, Reed says.
“Everyone is looking closer at everything in their household budgets,” Reed says. “Why aren’t people buying now? What are people waiting for? Perhaps that is the most basic question.”
Auto sales have fallen across most demographics and most vehicle categories. In a typical year, 16 million cars are sold in the United States. Reed says the numbers are showing that fewer than 13 million will sell this year.
The fact that automakers are selling fewer vehicles is forcing them to take drastic steps to cut inventories. Chrysler announced it will be shuttering all 30 of its factories for a month. Ford is suspending operations at 10 plants for a week, and GM is closing 20 factories for much of January.
“We have gotten into the habit of changing cars more fluidly and quickly, but needing has replaced wanting,” he says. “Discretionary buying has ceased.”
Many observers are hoping that the deferred buying will translate into pent-up demand as people try to limp their cars along until they finally give out.
But economist Johnson says he wouldn’t bet on the market unleashing that demand any time soon.
“The consumer has seen a big drop in income and a big drop in wealth. People are doing the normal thing that you would expect to see in this situation. They are reacting by cutting back on discretionary costs,” he says.
The pent-up demand only becomes relevant if the general economy recovers, which Johnson says isn’t likely until the middle of 2009 at the earliest.
Michael Giusti is a freelance writer who teaches journalism at Loyola University New Orleans.